How does inflation impact your retirement?

How inflation impacts your retirement

Saving for retirement

Early career

You may shift your financial priorities to deal with the immediate impacts of inflation, such as paying bills and ongoing expenses.

You may have to re-evaluate or create a budgetOpens in a new window to help you reduce your spending, and you may contribute less to your savingsOpens in a new window as a result. In some cases, you may even have to dip into savings to help with the cost of everyday living.

This could be helpful in the short-term, especially if you're struggling. However, stopping contributions to your retirement savingsOpens in a new window even for a short time can have a big impact on how much you'll have in your nest egg when you come to use it.

The money you invest will grow over time through compound interestOpens in a new window; the less you save now, the less interest earned over time, which ultimately means less money in total when you reach retirement age.

When looking at your budget, if you feel you need to adjust to account for inflation, consider reducing your contributions to your personal savings and/or workplace savings plan instead of stopping them completely.

Mid-career

If investingOpens in a new window is part of your financial plan for retirement, you could find that your portfolio is impacted by the stock market. During periods of inflation, consumer confidence drops and interest rates often riseOpens in a new window, and both things can cause stock market volatilityOpens in a new window.

It can be tempting to want to sell assets when the market dips, but the stock market is cyclicalOpens in a new window, meaning it will go through both highs and lows.

Selling during a low period could mean potentially missing out on gains when the prices recover. Instead, you may consider making consistent contributions even when markets have dropped, an investment strategy known as dollar-cost averaging, which can help you buy more shares at a lower price point.

As you still have some time before retirement, there’s time for the markets to correct themselves and to recover any losses your portfolio may have experienced due to inflation. Avoiding emotional investing and ensuring your portfolio is diversified can help you managed periods of uncertainty in the market.

Nearing retirement

If you’re nearing retirementOpens in a new window, you may want to weigh the pros and cons of waiting another year or 2 before stopping work.

On the upside, you could contribute more to your savings while the government takes measures to curb inflation and markets correct themselves. However, you may not want to continue working and maybe keen to start the next chapter of your life regardless of inflation.

Each situation is unique, and the picture of retirement looks different for everyone, so talking this decision through with your loved ones and or your advisor can help you make the best choice for you.

Already retired

If you’re already living on retirement income, there may be other things to consider when it comes to the impact of inflation.

For example, you may already have a plan in place for how long you want your retirement savings to lastOpens in a new window. That plan may have been based on receiving a set income each month to pay for set expenses.

However, if your retirement income remains the same but your expenses suddenly start to rise due to inflation, you may find your money is not stretching as far as you hoped. You may need to re-examine your retirement budgetOpens in a new window and speak to your advisor to see where and if you can make changes.

If you’re continuing to invest during your retirementOpens in a new window, you should consider carrying out a portfolio review to make sure your investment allocations and risk levels remains aligned to your goals.

The stock market can react to inflation - but the good news is, government pensions such as the Canada Pension Plan (CPP)Opens in a new window /Quebec Pension Plan (QPP)Opens in a new window and Old Age Security (OAS)Opens in a new window are indexed to keep up with inflation.

The CPP is adjusted every January while the OAS is adjusted each quarter. While they may not match inflation exactly and may not be enough to live off on their own, these payments will increase as the price of living does to help retirees manage.

If you’re thinking about downsizing in retirement, you may find that inflation works to your advantage, especially if you’re relocating somewhere with a lower cost of living. This is because during inflation house prices often rise, meaning you could sell for a higher price and then move somewhere that costs less.